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Who Was Surprised by Lowe's Guidance?

Motley Fool - Sat Mar 11, 9:13AM CST

In this podcast, Motley Fool senior analyst Bill Mann discusses:

  • Solid fourth-quarter results from Lowe's being overshadowed by its guidance for the new fiscal year.
  • The fact that some people on Wall Street are still surprised by cautious guidance.
  • The relative attractiveness of Lowe's stock.

Motley Fool analyst Yasser El-Shimy and Motley Fool producer Ricky Mulvey talk about four stocks they bought recently.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on March 01, 2023.

Chris Hill: It's official: We've got a trend among major retailers. Motley Fool Money starts now.

[music]

I'm Chris Hill. Joining me today: Motley Fool Senior Analyst Bill Mann. Thanks for being here.

Bill Mann: Hey, Chris. How are you?

Chris Hill: I'm a Lowe's shareholder, so I've been worse.

Bill Mann: Oh, you're OK.

Chris Hill: I'm OK. Let's talk about Lowe's. Fourth-quarter revenue, lower than Wall Street analysts were expecting. Revenue guidance for the new fiscal year was also a bit lower than Wall Street was hoping for. They are guiding for same-store sales growth of somewhere between 0% and -2%, and shares of Lowe's are down about 5% this morning. We'll get to broader topics in a minute, but I'm curious -- what, if anything, surprised you about Lowe's results?

Bill Mann: Basically, the thing that surprised me most about Lowe's results is the fact that analysts don't seem to get out of New York City often enough to see what's really going on at stores around the country. Back to you, Chris.

Chris Hill: I cannot argue with that. I'm not sure why, at this point in this earnings season, the guidance that we're getting from major retailers like Lowe's is surprising anyone who is paying attention.

Bill Mann: Exactly. There's a couple of things specific about Lowe's. If anyone was surprised about Lowe's results, they didn't pay attention to the drivers from Home Depot's results, because I don't know if you know this, Chris, but they're very similar companies, and they both deal in heavy, I guess what you would describe as branded commodities, yes, but also they deal in commodities. So what was the commodity from 2022 that has seen an incredible drop in price in 2023? That is lumber.

When they're beating on earnings but missing on revenues for a company like this, what you have to know is that one of their inputs has changed dramatically. In this case, to me, it has to be lumber, and I don't really understand stand how analysts or the Street were surprised about this.

Chris Hill: That's why, to go back to their guidance for same-store sales growth for the new fiscal year, you can do a double-take at that number, like whoa, you're saying at best your same-store sales are going to be flat? But we've seen for months now that it's higher prices boosting the same-store sales numbers for retailers across the board. It's not traffic in the stores; it's inflation that's been doing the heavy lifting.

Bill Mann: Absolutely true with most stores. But again, Home Depot and Lowe's, who we're talking about Lowe's here, also have what are essentially straight commodity sales. I mean, nails, sheet metal, but especially lumber, and lumber is driven by market pricing. That has nothing to do with Lowe's or Home Depot's capacity to sell it.

Now, they also did point to a rising-interest-rate environment and lower home starts. But maybe even more Lowe's than Home Depot are much more levered to home improvement than they are homebuilding. That's not necessary yet.

I just look at the guidance as being them, as saying, once again, what we should all know by now, it's that as we are coming out of one of the weirdest periods of time in American economic history; the pandemic and then the quickest rise in inflation that we have seen ever in terms of just how fast prices have gone up. I guess that's the definition of inflation. Don't you think? Thank you.

I'm not talking about other kinds of inflation, Chris. I'm talking about the specific kinds of inflation where prices go up. These companies don't know how to get out in front and make predictions based on those two elements, and I don't really understand why the market thinks that they should be able to do that, because it's literally nailing Jell-O against a wall.

Chris Hill: Let's stick with that topic, because now, we've got this earnings season. Really in the past two weeks, Lowe's, Home Depot, Walmart, Target, experienced CEOs and management teams at all four businesses, they're all giving roughly the same guidance.

A topic that came up way back in the day -- not that he was the only one who engaged in this type of activity, but the person I always think of is Steve Jobs. The whole idea of like, they're sandbagging on the guidance, he's being overly cautious so he can beat it. Maybe that was true, maybe that wasn't.

But I look at this and think, well, even if they are sandbagging a little bit, even if that's 5% of that, one, I think they've earned the right to do that. Two, as you said, it's not just that we've had a rough economic time and that 2022 was the worst year for the market in over a decade.

You used the word "weird," no, and you're right. I think more people need to really embrace that idea. It wasn't just that we've gone through a rough economic time, it's a particularly weird rough economic time that is unlike others that we've had. Wouldn't it be strange, if not outright alarming, if any of these CEOs of major retailers came out and said, "Actually, we're feeling really great about the next 12 months, and we've got much rosier guidance than you ever could imagine."

Bill Mann: Yeah. To me, it goes back to that uncertainty principle, which basically holds that you can't observe something without fundamentally changing it. In this case, the uncertainty principle is this: When you go to CEOs, you go to management teams, and you ask them what the next year is going to go like, they're going to look at their inputs. The more uncertain their inputs are, the more naturally conservative they're going to be, because, Chris, I don't know if you know this, but CEOs hate disappointing people. They hate disappointing the market.

You can't observe and make these predictions and throw things out there, and then if you disappoint the market, not expect the market to react just as it has with Lowe's today. I mean, I can't stress this enough. Lowe's quarter was fine, and their guidance was actually OK, but it comes in an environment in which the basic inputs for Lowe's, including labor, including raw supplies, are essentially unhinged from quarter to quarter from where they have just been. It's really hard for these CEOs to get ahead of the fact that they don't know, at this point, what they don't know, and so the easiest way to manage that is to come in and say, our upcoming period is going to be less than we thought or at least be conservative.

Chris Hill: So for anyone who had Lowe's on their watch list, and they've got an appropriate time horizon for a business like Lowe's, do you look at what's happening with the stock today as a little small present? It's like, here, if you liked it before, it's 5% cheaper now.

Bill Mann: I do. Lowe's has been, historically, an unbelievable-performing company. It's a five-bagger in the last decade, which is, for a retailer, just great. So yes, it's down about 15% in the last year.

It's never a cheap stock. I think it's very rare that Lowe's seems like a screaming bargain. But it is a company that is incredibly well managed. It essentially has a duopoly with Home Depot in an area of the market that still has growth ahead of it even if you can't look out over the next year and say, the growth trajectory is obvious.

Chris Hill: Bill Mann, always great talking to you. Thanks for being here.

Bill Mann: Hey, thanks, Chris.

[music]

Chris Hill: Just like you, we're investors, and just like you, we are on the lookout for companies to become part owners of. Motley Fool Senior Analysts Yasser El-Shimy and Ricky Mulvey share four stocks they bought recently.

Yasser El-Shimy: I like to dip my toes in the water. Just take a small position that allows me to study the company a little bit. Then, as my conviction grows, as I study and follow the company carefully, I tend to add to them consistently, hopefully as I see them execute against the KPIs or the measures that I think they need to be executing against. Then I tend to hold, obviously, as long as possible as a Foolish investor.

Ricky Mulvey: One of the companies that you brought up is Arhaus Furniture, which is, they sell luxury furniture. You can imagine a store in a mall selling a chandelier unironically, you might be in an Arhaus store, and that's one of the companies you brought up today.

Yasser El-Shimy: You're absolutely right. Arhaus has been one of my recent purchases -- or let me rephrase that. It has been a company that I've been adding to, including purchasing more shares recently as they have updated their guidance yet again by raising the guidance in last November to show that they are going to beat the forecast. The previous guidance, both in terms of revenue growth and on the bottom line as well.

But it's funny because I like to fall in love with the companies that I invest in. Arhaus was no exception. One day, I was walking down the mall, and I literally just stumbled upon Arhaus store, and I was just wowed by just how modern and how beautiful the design of the furniture was in the store. That made me or drove me to dig in a little bit about the company, and when it did go public, I was like, I need to take a small stake here and then follow the company and add to them if they seem to be doing well, and doing well they have.

Ricky Mulvey: There's a lot of competitors in this space. You have Williams-Sonoma, Restoration Hardware. I don't follow this space closely, so I have a hard time differentiating what one luxury furniture retailer does differently than another, especially when they're both in a lot of malls.

Yasser El-Shimy: Yeah. Arhaus, I would say, is a bit unique in its value proposition based on just the designs that they offer are much more modern, as I said, compared to a Restoration Hardware store, which would, if you step in it, you would be just astounded by the gaudy and old-fashioned. Still luxury furniture, but just not something that would ever appeal to me. Arhaus threads that needle pretty well. It's also a premium product, unlike, let's say Williams-Sonoma, which is middle of the market, targets middle class, upper middle class. This is clearly in the higher-class, upper-class category.

It also has leadership in place that has been there for several decades, since 1986. John Reed has been the founder and CEO of the company. They have also shown some pretty good responsibility in terms of how they allocate capital. They've had pretty good returns on invested capital and returns on equity that are in the triple digits.

One thing we should keep in mind when we're talking about an Arhaus or Restoration Hardware, as opposed to some other furniture retailers, is that those that target the luxury consumer, they tend to experience less cyclicality than something that would be more mainstream, let's say, as a Williams-Sonoma.

Ricky Mulvey: That's a little counterintuitive. You would think that folks would trade down from luxury brands to midtier brands. But I guess you can make that case for any retailer.

Yasser El-Shimy: That's true. This is like luxury as in you and I can't probably afford it. Or I could potentially afford it, but I would have to forego my student loan payments, which should not be a wise thing to do. But this is not for me. This is for people who are very well-to-do and have plenty of money to spend. The category of consumer tends not to be as affected by a cyclical downturn in the economy than your average middle-class consumer.

Ricky Mulvey: Anything on valuation?

Yasser El-Shimy: Yeah. The company currently trades at around 16 times next-12-months price-to-earnings multiples. Now, that may not seem cheap for home furniture retailer compared to, say, Williams-Sonoma, which trades in the mid-single digits, but it's roughly on par with Restoration Hardware or RH.

Part of my thesis, I was actually accumulating at much lower multiples, but I still like it here. Part of the reason is, as I said, the luxury consumer has shown itself to be much less vulnerable to these downturns. The company has been not only meeting their estimates and guidance but raising the forecast as well. They have been doing well in an extremely challenging and difficult 2022.

One thing I like about it here, and I think it should even command a higher premium than Restoration Hardware, is that this company has a lot of room to grow, both in the top line and the bottom line, for many years to come. Take, for example, the current count of showrooms they have. They have roughly around 82, 83 showrooms. They target to double that to above 165 showrooms, eventually. They are adding about five to seven showrooms per year. There will be plenty of room to grow for many, many years to come, especially as brand awareness increases. I can't say the same about RH.

Ricky Mulvey: One on the opposite end that I recently purchased was Big Lots, which is a furniture retailer. It is currently priced below a 0.1 price-to-sales multiple, which could be priced for death. Back in December, Jim Gillies spoke with me about why it could either essentially survive and triple or completely go to zero and put a small position in that. Let's ride.

Moving on to the next one though, I would describe this literally as a company that makes widgets, basically taking solar energy and making the electricity usable in a modern system, and that is EnphaseEnergy.

Yasser El-Shimy: That's right. This company has effectively and single-handedly reinvented the way power is managed from the solar panels on top of your roof and how you connect.

As we know that solar panels, they produce energy as DC current, and you need to convert those into alternating current, or AC, in order to be able to use it at your home for your appliances and so on. Now, the traditional way this was done was through something called a string inverter, which effectively meant that there was a single point of failure for the entire system. If one of your panels goes out of commission or there's, let's say it's shaded by tree branch or whatnot, this meant that your entire solar power production goes offline or is strongly diminished.

Basically what Enphase did, it said, no, we can do this through microinverters. We can effectively let each panel produce its power. We convert that at the spot of each panel and then let it flow so that even if one or two or more solar panels go out of commission, you're still getting production.

Another thing they've done is they've introduced new products. They've been trying to effectively create themselves as a one-stop shop for the entire residential solar power management solution space. In addition to the microinverters, which we just talked about, they have also come up with a battery storage system that allows you to store the energy that's produced by the solar power in case you are not using it on the spot and perhaps being able to use it, let's say, on a shady day or cloudy day, or the evening when there is no sun.

Also, they have recently acquired a company that does residential power charging for electric cars. They've been positioning themselves pretty nicely in that space.

Ricky Mulvey: It's not a cheap company by any stretch. I think it's trading at about 100 times earnings. Do you think the company's future is worth that high price of admission?

Yasser El-Shimy: Yes, I do. Otherwise, I would not be adding to it, obviously. I think that Enphase is a premium company worthy of a premium valuation.

The reason is, as I said, has been a complete pioneer in this field, creating a product that is just leaps and bounds ahead of any competitor. They have shown that management is also pretty darn good with their capital allocation. They have maintained consistently high and rising returns on invested capital and equity, and they literally cannot sell them fast enough. They are planning to double their manufacturing capacity from 5 million microinverters per quarter right now to 10 million per quarter by the end of 2023 in order to meet all of this demand that's coming both domestically and internationally.

We're expecting also that the Inflation Reduction Act, which includes lots of subsidies for the solar space, is going to help propel demand for these products a lot more. This is a secular growth story with multiple tailwinds. I expect that they will not have any problems growing into this rich valuation.

Ricky Mulvey: Anything else on Enphase before we wrap up? You got a high Net Promoter Score. It seems like they're selling a lot of these widgets, and people tend to like them.

Yasser El-Shimy: That's right. Their primary customers are actually contractors, who are going to buy those interface products and set them up on your rooftop. You don't buy the microinverter directly or the battery storage system directly, although you can, I guess, if you wanted to. But often, it's your contractor, and those contractors have been very happy with their experience dealing with Enphase for a couple of reasons.

One of which is that Enphase actually has a digital platform that allows contractors to plan and set up and design how they are going to install the entire solar power system throughout your home.

But the other, perhaps more important reason here is that they take customer service very seriously, and they have about a minute-and-a-half wait time only for their customer service response. These customers are pretty happy, and the 71 Net Promoter Score is very high for a company in this space.

Ricky Mulvey: Very nice. Then to wrap up, I'll say one stock I recently purchased, too, it's a REIT, was Mid-America Apartments. They have about 100,000 apartment units, primarily in the Sun Belt Southwest regions. Basically, I think there was a dip in it because they had 15% rental growth last year. Then this year, they're projecting about 3% rental growth. I really like the sound of analysts fussily changing their models.

Chris Hill: Have you purchased any stocks lately? Let us know, drop an email at podcasts@fool.com, maybe we'll talk about them on the show.

As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.

Bill Mann has no position in any of the stocks mentioned. Chris Hill has positions in Home Depot, Lowe's Companies, and Target. Ricky Mulvey has positions in Big Lots, Home Depot, and Mid-America Apartment Communities. Yasser El-Shimy has positions in Arhaus and Enphase Energy. The Motley Fool has positions in and recommends Home Depot, Mid-America Apartment Communities, Target, Walmart, and Williams-Sonoma. The Motley Fool recommends Arhaus, Big Lots, Enphase Energy, Lowe's Companies, and RH. The Motley Fool has a disclosure policy.

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